Monday Market Conditions

02/25/2008
US rate markets opened somewhat weaker this morning on weekend developments that Ambac will get a $3B lifeline, and global demand for riskier assets perking back up. The 'bailout' of the bond insurers was widely expected lat Friday so the reaction this morning isn't as bond negative since a lot of the action took place late Friday.

Jan existing home sales hit a few minutes ago; markets were expecting a decline of 1.8% to 4.80 mil units (ann). As reported sales were down 0.4% to 4.89 mil units; sales in Jan were 23.4% lower than in Jan 2007, inventories increased 5.5% with a 10.3 month supply, the median home price fell 4.6%. Too soon to say just how the markets will take the report, but the initial reaction was selling in the stock market and minor selling in the treasury and mortgage markets.


This week's economic data and estimates:

Tuesday:
Jan PPI (overall +0.3%, core +0.2%)
Feb consumer confidence (82.5 frm 87.9 in Jan)
Wednesday:
Jan durable goods orders (-4.0%)
Jan new home sales (-0.7% to 600K units)
Thursday:
Q4 GDP prelim, (+0.8% frm +0.6%)
weekly jobless claims (+3K to 352K)
Friday:
Jan personal income (+0.2%0
Jan personal spending (+0.2%)
PCE core inflation (+0.2%)
Chicago purchasing mgrs index (50.0 frm 51.5 in Jan)
U. of Michigan consumer sentiment index (70.0 frm 69.6)

Not only economic data this week but supply hits with the monthly 2 yr note auction on Wednesday, expected to be $24B and Thursday the 5 yr note, expected to be $14B.

On Wednesday and Thursday Fed head Bernanke will go to the House and Senate to meet the semi-annual requirements to testify on monetary policy and the economy. He has spent a lot of time at Congress in the past few weeks so we are not expecting any real bombs from him; however, when the Fed chief speaks markets pay a lot of attention.

The proportion of economists who forecast a U.S. recession this year more than doubled in three months, to 45%, according to a survey by the National Association for Business Economics. Of those, a majority expect the downturn to be "relatively muted,'' according to the poll of 49 professional forecasters taken Jan. 25 to Feb. 13. Less than 20% predicted a downturn in the previous poll completed Nov. 6. The spillover from the biggest housing slump in a quarter century, turmoil in financial markets and higher energy prices will cause growth to slow to an annual pace of 0.4% this quarter and 1,0% in the second quarter, the survey found. (Bloomberg) Economists and analysts on The Street are historically reluctant to forecast recessions, and when they do it is generally understated as to the depth and longevity.

Trade in the equity and bond markets is likely to be contained in the early part of the week. With economic data, Bernanke's testimony, and two Treasury auctions, markets should carry a slight negative bias in both stocks and bonds. That said, we can have more confidence in how the rate markets will act and less confidence on how the stock market will perform. The stock market is more emotionally charged that the bond market, thus the swings are difficult to predict. Technically, the bond and mortgage markets have a slight bearish bias now with the bellwether 10 yr note holding into support at between 3.80% and 3.85%. As has been the situation for months, if selling in the equity markets increases money will flow to Treasuries on trading. The long end of the curve will have a hard time ignoring the potential outlook for increases in inflation as most major global central bankers (including our Fed) continue to beat the inflation worry drum.

Investors continue to avoid buying mortgages in the current environment, causing mortgage rates to increase against the 10 yr treasury note. Scared to death about the appraisals and what will happen to the junk they purchased in the sub prime mania that has devastated the mortgage and residential industries. Got a home equity loan? Lenders are increasingly cancelling them, pulling the rug out from borrowers that thought they had the credit. New appraisals are causing lenders to contact those with home equity loans and simply canceling them, particularly in areas where property values are under pressure.

Banks Lose to Deadbeat Homeowners as Loans Sold in Bonds Vanish

Feb. 22 (Bloomberg) -- Joe Lents hasn't made a payment on his $1.5 million mortgage since 2002.
That's when Washington Mutual Inc. first tried to foreclose on his home in Boca Raton, Florida. The Seattle-based lender failed to prove that it owned Lents's mortgage note and dropped attempts to take his house. Subsequent efforts to foreclose have stalled because no one has produced the paperwork.
``If you're going to take my house away from me, you better own the note,'' said Lents, 63, the former chief executive officer of a now-defunct voice recognition software company.
Judges in at least five states have stopped foreclosure proceedings because the banks that pool mortgages into securities and the companies that collect monthly payments haven't been able to prove they own the mortgages. The confusion is another headache for U.S. Treasury Secretary Henry Paulson as he revises rules for packaging mortgages into securities.
``I think it's going to become pretty hairy,'' said Josh Rosner, managing director at the New York-based investment research firm Graham Fisher & Co. ``Regulators appear to have ignored this, given the size and scope of the problem.''
More than $2.1 trillion, or 19 percent, of outstanding mortgages have been bundled into securities by private banks, according to Inside Mortgage Finance, a Bethesda, Maryland-based industry newsletter. Those loans may be sold several times before they land in a security. Mortgage servicers, who collect monthly payments and distribute them to securities investors, can buy and sell the home loans many times.
Housing Boom
Each time the mortgages change hands, the sellers are required to sign over the mortgage notes to the buyers. In the rush to originate more loans during the U.S. mortgage boom, from 2003 to 2006, that assignment of ownership wasn't always properly completed, said Alan White, assistant professor at Valparaiso University School of Law in Valparaiso, Indiana.
``Loans were mass produced and short cuts were taken,'' White said. ``A lot of the paperwork is done in the name of the original lender and a lot of the original lenders aren't around anymore.''
More than 100 mortgage companies stopped making loans, closed or were sold last year, according to Bloomberg data.
The foreclosure rate, at 1.69 percent of all U.S. homeowners, is the highest since the Mortgage Bankers Association began tracking it in 1993. The foreclosure rate for subprime borrowers, who have bad or incomplete credit and whose mortgages typically are securitized by private banks rather than government-sponsored entities Fannie Mae and Freddie Mac, is at a four-year high, according to the mortgage bankers.
750,000 Homeowners
More than 1.5 million homeowners will enter the foreclosure process this year, said Rick Sharga, executive vice president for marketing at RealtyTrac Inc., the Irvine, California-based seller of foreclosure information. About half of them, 750,000, will have their homes repossessed, Sharga said.
Borrower advocates, including Ohio Attorney General Marc Dann, have seized upon the issue of missing mortgage notes as a way to stem foreclosures.
``The best thing to do is to keep people in their homes and for everybody to take steps necessary to make that happen,'' said Chris Geidner, an attorney in Dann's office. ``These trusts are purchasing these notes, and before they even get the paperwork, they foreclose on people. They become foreclosure machines.''
Lost-Note Affidavits
When the mortgage servicers and securitizing banks that act as trustees of the securities fail to present proof that they own a mortgage, they sometimes file what's called a lost-note affidavit, said April Charney, a lawyer at Jacksonville Area Legal Aid in Florida.
Nobody knows how widespread the use of lost-note affidavits are, Charney said. She's had foreclosure proceedings for 300 clients dismissed or postponed in the past year, with about 80 percent of them involving lost-note affidavits, she said.
``They raise the issue of whether the trusts own the loans at all,'' Charney said. ``Lost-note affidavits are pattern and practice in the industry. They are not exceptions. They are the rule.''
State laws generally make it difficult to foreclose because they favor the homeowner, said Stuart Saft, a real estate lawyer and partner at the New York firm Dewey & LeBoeuf LLP.
``All these loan documents are being sent to the inside of a mountain in the middle of America and not being checked very carefully,'' Saft said. ``The lenders can't find the paper. We're dealing with a lot of paper produced in a mortgage closing.''
`Waste of Time'
Requiring banks to produce the paperwork at a foreclosure hearing is a nuisance, said Jeffrey Naimon, a partner in the Washington office of Buckley Kolar LLP.
``It's a gigantic waste of time,'' Naimon said. ``The mortgage may have transferred five, six, eight times. It's possible that you don't have all the pieces of paper, but it was enough to convince the next guy in the chain. There's no true controversy over whether the owner owns the loan.''
Judges are becoming increasingly impatient with plaintiffs who produce no more proof of ownership than a lost-note affidavit or a copy of the note, said Michael Doan, an attorney at Doan Law Firm LLP in Carlsbad, California.
``Things are heating up,'' Doan said.
In Ohio, where RealtyTrac reported an 88 percent jump in foreclosures last year, Dann, the attorney general, is now arguing 40 foreclosure cases that challenge ownership of mortgage notes, according to his office.
`Cavalier Approach'
U.S. District Judge David D. Dowd Jr. in Ohio's northern district chastised Deutsche Bank National Trust Co. and Argent Mortgage Securities Inc. in October for what he called their ``cavalier approach'' and ``take my word for it'' attitude toward proving ownership of the mortgage note in a foreclosure case.
John Gallagher, a spokesman for Frankfurt-based Deutsche Bank AG, said the bank had no comment.
Federal District Judge Christopher Boyko dismissed 14 foreclosure cases in Cleveland in November due to the inability of the trustee and the servicer to prove ownership of the mortgages.
Similar cases were dismissed during the past year by judges in California, Massachusetts, Kansas and New York.
``Judges are human beings,'' said Kenneth M. Lapine, a partner at the Cleveland law firm Roetzel & Andress LPA. ``They no doubt feel the little guy needs all the help he can get against the impersonal, out of town, mega-investment banking company.''
Warning Plaintiffs
U.S. Bankruptcy Judge Samuel L. Bufford in Los Angeles issued a notice last month warning plaintiffs in foreclosure cases to bring the mortgage notes to court and not submit copies.
``This requirement will apply because developments in the secondary market for mortgages and other security interests cause the court to lack confidence that presenting a copy of a promissory note is sufficient to show that movant has a right to enforce the note or that it qualifies as a real party in interest,'' the notice said.
Quick foreclosures benefit communities because properties in default lose value and homeowners in financial distress don't maintain their houses or pay real estate taxes, said Saft of Dewey & Leboeuf.
Painted as the Enemy
``When banks originally made the loans they used people's money from pension funds and savings accounts and they should be allowed to foreclose the loan as quickly as possible before the property depreciates in value any more,'' Saft said. ``The mortgage industry has been painted as the enemy when all they did was make loans to enable people to buy homes. Now there's less money available for new borrowers to buy homes and that's what's causing the value of homes to go down.''
Lents is former CEO of Investco Inc., a Boca Raton, Florida-based developer of voice recognition software. In 2002, the U.S. Securities and Exchange Commission sanctioned Lents and others for stock manipulation, according to the SEC Web site. He lost his job, was fined and his assets were frozen. That's the reason he couldn't pay his mortgage, he said.
``If the homeowner doesn't object to the lost-note affidavit, the judge rubber-stamps it,'' Lents said. ``Is it oversight, or are they trying to get around the law?''
Washington Mutual spokeswoman Geri Ann Baptista said the bank had no comment.
Looking for Loopholes
``I can't believe the handling of notes is worse than it was five years ago,'' said Guy Cecala, publisher of Inside Mortgage Finance. ``What we didn't have back then were armies of attorneys out there looking for loopholes. People are challenging foreclosures and courts are paying a lot more attention to foreclosures than they ever did before.''
American Home Mortgage Investment Corp., the Melville, New York-based lender that filed for bankruptcy last August, said it was paying $45,000 a month to store loan paperwork and petitioned U.S. Bankruptcy Judge Christopher Sontchi in Wilmington, Delaware, for the right to toss it all. Sontchi ruled last week that American Home Mortgage could charge banks from $3 to $13 a file to retrieve documents.
The home-loan industry has had a central electronic database since 1997 to track mortgages as they are bought and sold. It's run by Mortgage Electronic Registration System, or MERS, a subsidiary of Vienna, Virginia-based MERSCORP Inc., which is owned by mortgage companies.
No Tracking Mechanism
MERS has 3,246 member companies and about half of outstanding mortgages are registered with the company, including loans purchased by government-sponsored entities Fannie Mae, Freddie Mac and Ginnie Mae, said R.K. Arnold, the company's CEO.
For about half of U.S. mortgages, there is no tracking mechanism.
MERS rules don't allow members to submit lost-note affidavits in place of mortgage notes, Arnold said.
``A lot of companies say the note is lost when it's highly unlikely the note is lost,'' Arnold said. ``Saying a note is lost when it's not really lost is wrong.''
Lents's attorney, Jane Raskin of Raskin & Raskin in Miami, said she has no idea who owns Lents's mortgage note.
``Something is wrong if you start from what I think is the reasonable assumption that these banks are not losing all of these notes,'' Raskin said. ``As an officer of the court, I find it troubling that they've been going in and saying we lost the note, and because nobody is challenging it, the foreclosures are pushed through the system.''
To contact the reporter on this story: Bob Ivry in New York at bivry@bloomberg.net.

Friday Market Conditions

02/22/2008

In very early trading this morning (7:00 AM) the 10 yr note traded 14/32 higher in price than the close yesterday; but by 9:00 the 10 was back to unchanged. Treasuries have nothing to work with today with just some Fed-speak hitting later. Trade is trying to add to yesterday's gains with the technical picture looking better providing these levels hold. The lack of drivers could weigh on bonds though with a recovery in stock land likely taking a bite out of the gains. All we have today is Dallas Fed Pres Fisher speaking at 1:30.

NY has a snow storm brewing, that may keep markets somewhat more orderly today as many won't make it in; and with no economic news until next week and being Friday the potential of a quiet day exists. That said, financial markets continue to demonstrate huge volatile ranges as investors and traders look for something to drive stocks and bonds.

Bloomberg has a story out today on the difficulties in foreclosing delinquent mortgages. The basis is that many lenders (servicers) that are attempting to foreclose on properties can't produce the mortgage note, without legal evidence attorneys for defendants are staving off foreclosure by arguing that since the lender can not produce to note there is no evidence the lender actually owns the mortgage. In the story there is one man highlighted that hasn't made a payment since 2002 and is still in his house as the judge refuses to grant the foreclosure since the note can not be produced. More losses for investors holding the mortgages, and that will add the investor reluctance to step back in the MBS markets. It seems that there is no end to the mess caused by the sub primes and other mortgages that were originated in the past six years.

Since there isn't any anticipated news or data today, the markets should stay quiet. Next week the economic calendar is full with existing and new home sales for Jan, the Jan PPI, personal income and spending and two treasury auctions (2 yr and 5 yr). Next week also has Bernanke headed to the House and Senate to meet the semi-annual requirements of what used to be known as Humphrey-Hawkins; the fed chief is required by law to testify on monetary policy and the economy twice each year (Feb and August). With all that next week, today should be a day of rest-----hopefully.

The rest of the day for the rate markets will be influenced by how the equity markets perform. At 10:00 the stock indexes are slightly better but show no enthusiasm with the data and Bernanke next week. So far this morning when the stock market futures were aiming at a strong opening the rate markets were unchanged, by 10:00 though the DJIA was sliding back to unchanged that added a little support to treasuries and mortgages.

Talk about poor thinking; in this environment with mortgage companies foreclosing on thousands of properties and the spotlight on everything coming from big mortgage companies; Countrywide is hosting a huge expensive ski resort conference in Colorado. Countrywide apparently doesn't know when to lay low, especially when the company is the poster boy for all that is wrong with mortgage lending.

Crude oil, after backing down yesterday on T. Boone Pickens's remarks, was up this morning, but unchanged at 10:00. The dollar is a little weaker this morning but also quiet.

Friday Market Conditions

02/15/2008

The February Empire State index fell 21 pts to -11.7 as new orders fell to -11.9 and shipments fell -21 pts to -4.9. Prices paid rose as prices received edged lower as the lack of manufacturing pricing power doesn't provide much inflation risk. Markets were forecasting the index at +7.5; in Jan the index sat at 9.0. Any reading in the indexes under zero indicates contraction. Put this report with the Philly Fed business index last month and the evidence is undeniable that the US economy is slowing quickly and with the credit market seize-up the outlook for a recession is gaining more credibility.

Jan industrial production was on target, up 0.1% with factory usage (cap utilization) was slightly better at 81.5% from 81.4% in Dec.

The U. of Michigan consumer sentiment index, expected at 76.5 from 78.4 at the end of Jan, fell to 69.6---should be supportive to the bond market and a negative for stocks, however the initial reaction has not improved prices in the bond market.

Net foreign purchases of US treasury coupons totaled a meager $1.4B in Dec. However, over the year 2007 net purchases by foreign investors exceeded the total of treasury issuance less maturing issues by $100B. Foreign buyers of US treasuries is one of the many reasons US interest rates are lower than they may be otherwise.

Nothing left on the calendars today; the bond market will close at 2:00 this afternoon (equities trade usual hours) and markets will be closed on Monday for President's Day. The rest of the day will see mostly position adjustments going into the long week-end. After the quick increase in interest rates this week and the short-covering rally in stocks Monday through Wednesday, the markets will likely see bonds do a little better and stocks possibly some weakness. Hard to handicap the stock market on a moment to moment basis though. The strong link between action in equities and the interest rate markets has momentarily been weakened a little. Inflation fears still infect long term treasuries, and the mortgage market remains toxic to investors as sub prime issues and the collapse of credit markets is far from over.
Technically, the 10 yr treasury note has so far successfully held its key support at 3.80%; yesterday the yield intraday popped to 3.83% and ended at 3.82%, but no follow-through so far today is encouraging for technicians.

Loan limits

02/08/2008

a loan originated between July 1, 2007 and December 31, 2008
may be purchased by Fannie and Freddie, as long as the loan amount does not
exceed the higher of $417,000 OR 125% of what HUD determines to be the area
median home price, with a maximum cap of $729,750. This will allow some loan
amounts higher than $417,000 to have significantly better pricing, at least for a
limited time frame.